Prior to the schedule adjustment, analysts had expected Dell to disclose sales of $13.5 billion and earnings of 35 cents per share. The Wall Street Journal reported, however, that the results will be "far worse than Wall Street had expected," with revenue of approximately $14 billion but earnings of only 20 cents per share. ISI Group analyst Brian Marshall told the Journal that Dell's profits might have taken a hit as it slashed prices to overcome the rocky PC market.
Michael Dell's attempts to take his company private, meanwhile, are being challenged by activist investor Carl Icahn. Last week, Icahn and Southeastern Asset Management proposed a deal that would pay shareholders a dividend of $12 a share, allowing some investors to cash out but keeping the company partially public. Dell, whom Icahn has said he would remove as CEO, offered $13.65 a share in the $24.4 billion buyout plan he spearheaded with private equity firm Silver Lake Partners.
A Dell special committee -- established to ensure investors' best interests are upheld, given the CEO's potential conflict of interest -- is mulling Icahn's proposal.
A disappointing earnings report could actually advance Michael Dell's agenda, as it would subvert Icahn's claim that Dell's buyout plan undervalues the company's assets and cheats shareholders. Earlier this year, Dell's stock rallied to more than $14 a share as investors reacted to the buyout announcement and the ensuing counterproposals. Wall Street turned bearish, however, after analysts began issuing gloomy PC forecasts in April.
Amidst all the drama, Dell has continued to tout its new identity as a software and services provider. Given the assets the company has accrued, it's easy to see why Michael Dell wants to shape that identity without being tethered to finicky shareholders and regulatory oversight. Wall Street has a reactionary recent history with tech companies, informed in part by the volume of trades that value short-term hedges over long-term patience. In a matter of months, Apple went from "most valuable company in the world" to "company that no longer innovates." Microsoft was downgraded by Goldman Sachs earlier this year due but is currently enjoying good buzz, now that investors have been reminded that Redmond, in addition to making Windows, also runs a lot of other profitable businesses -- like Office and Azure. Given that Michael Dell's plan might necessitate a few more quarters of rough financial results, it's hard to believe the CEO would be able to capitalize on his vision if the company remains public.
That being the case, the question becomes whether one trusts Dell's vision. The CEO has offered little insight into how he'll use his new freedoms if he succeeds in taking the company private. But as one of the richest people in the world, he can pursue virtually anything he wants. That he is staking billions of dollars of his own money suggests serious conviction. Then again, it's been a long time since the company's heyday as the world's largest PC seller.
This cohesiveness is important. Michael Dell declared last December at Dell World that his company's transition was complete. Showing that its various acquisitions constitute an end-to-end package, rather than a confusing hodgepodge, validates that statement.
The company also has investments in ARM-based hyperscale servers, which could prove prescient in coming years. And it has valuable offerings in storage, virtualization and cloud-computing as well. The company derives a lot of its money -- too much of it, which is why its CEO wants to privately restructure -- from PCs. But Dell's current identity looks a lot more like IBM, a company that underwent a similar reinvention, than it does the earlier versions of itself.
The challenge Dell faces -- no matter who ends up running the company -- is to show that these enterprise strengths form a foundation for lasting success.
IDC analyst Matt Eastwood, in an email interview conducted prior to the schedule change in Dell's earnings announcement, said, "Dell has a nice set of capabilities, but can't afford to stand still." The software and services market changes rapidly, he said, and customers want to see Dell "sustain innovation organically and not simply rely on acquisitions to drive their diversification."
Server Market SplitsvilleJust because the server market's in the doldrums doesn't mean innovation has ceased. Far from it -- server technology is enjoying the biggest renaissance since the dawn of x86 systems. But the primary driver is now service providers, not enterprises.
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